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What are the SME Lending Regulations?

In December 2015, the Central Bank of Ireland published a revised Regulation for Business Lending to Small and Medium Enterprises called the SME Regulations. The SME Regulations set out new requirements for lenders when dealing with SMEs who are facing or in financial difficulty. This code was effective from 01 July 2016.

The objectives of the regulations are:

To facilitate access to credit for sustainable and productive business propositions

To promote fairness and transparency in the treatment of small and medium enterprises

To ensure that when dealing with financial difficulties cases, the aim of a regulated entity will be to

Assist borrowers to meet their obligations, or otherwise deal with the situation in an orderly and

Initially, problems may not seem that serious. Sales may be slightly down or the cash coming into the business may not quite meet the outgoings.

The business carries on as normal in the hope that next month’s cash flow and sales figures will improve. However, if figures don’t improve, the business could find itself inundated with demands from suppliers and it may be difficult to pay staff.

If the problems aren’t resolved then the result can be insolvency. The key is to be pro-active with measures that will put your business back on an even keel.

What should I do?
By spotting the early warning signs, you will be in a much stronger position to put things right.

If the time-delay between the raising of an invoice and the customer paying is causing cashflow problems, there are a number of possible solutions. These include:

• Focus on winning business that will generate cash quickly.
• Tighten credit control. Make sure invoices are sent out on time. Chase payment when it becomes due.
• Consider factoring or invoice discounting arrangements, where cash is lent to you by the bank as soon as an invoice is raised.
• Keep track of the financial health of your customers and suppliers.
• Change payment periods.
• If there is no real chance of sales improving, then you should consider other measures such as selling assets, cutting staff and reducing costs and/or inventory in order to free up cash.

Talking to your bank
Make the time to regularly talk to your bank. For instance, if your problems are caused by a lack of available finance due to overly rapid growth, a bank is more likely to provide the funds if the problem is identified early and brought to its attention.

If your financial situation threatens your ability to meet existing repayment obligations, banks are more likely to be sympathetic if you talk to them early and present a credible business plan.

The one thing you should never do is trade while insolvent. If the company runs out of cash, then it is illegal to take orders from customers or take goods on credit from suppliers. There are serious penalties for breaking this rule.

If the company runs out of cash, then it is illegal to take orders from customers or take goods on credit from suppliers. There are serious penalties for breaking this rule.

However, the definition of insolvency is complex and it’s not always easy to know when you’ve crossed the line. If in doubt, seek advice from your lawyer or accountant. If you are insolvent, the next step may be administration.

Administration and involuntary arrangements
Administration occurs when a company’s financial difficulties prompt creditors, stakeholders, or sometimes the directors themselves, to apply for a court order to begin the process.

While it sounds drastic, administration needn’t be the end of the road. Under the recently enacted Enterprise Act, the accountants who take over the running of a company in administration have a duty to do all they can to return the business to operational health.

A variation on the theme is administrative receivership. This occurs when a creditor or lender has a claim on the company’s assets to cover non-payment. In these cases the role of the receiver is to recover assets for that particular creditor.

One useful means of getting through a period of crisis is to reach a formal agreement with creditors under a Company Voluntary Arrangement (CVA). Under these agreements, creditors and the company agree a legally enforceable recovery plan. Once a CVA is in place, creditors can’t sue for repayment for an agreed period of time and the company has time to recover.

Similarly, sole traders with debts of less than £5000 can apply for an administration order, which will allow them to pay the courts an agreed monthly sum that will be divided among creditors.